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Posts Tagged ‘Asia’

Whitehaven ends talks with potential bidders

May 16, 2011 Comments off

“Whitehaven Coal of Australia has ended talks with potential suitors from Asia and the US after a near-seven month auction failed to elicit a ‘sufficiently attractive’ proposal that it could recommend to shareholders. The collapse of the auction saw Whitehaven’s shares fall as much as 16 per cent to A$5.43 before they recovered to close down 80 cents at A$5.63. The group declined to comment on reports it was seeking offers of at least A$7 a share, valuing its business at A$3.5bn.

China’s Yanzhou Coal, which paid A$3.5bn for Australia’s Felix Resources in 2009, was one of a handful of parties interested in Whitehaven, together with Korea Resources Corp, the South Korean state-owned company. Aditya Birla Group, the Indian conglomerate, and Peabody Energy, the US coal group that failed in its attempt to buy Australia’s Macarthur Coal last year for A$3.8bn, were also understood to have examined a bid for Whitehaven.”

Source: Financial Times, May 16 2011

Observations:

  • A Korean consortium led by Kores launched the only published bid for Whitehaven in February. Whitehaven started an auction procedure after being engaged by other potential bidders. It now appears none of the auction participants is willing to offer a satisfactory price.
  • The recent rise of the australian dollar makes the purchase of Australian assets less attractive. Commodity markets are setting prices in American dollars, while Whitehaven’s costs are mainly in Australian dollars. As a result, costs increase without revenues going up by the same ratio.

Implications:

  • Both the Australian and the American coal mining sectors are going through a wave of consolidation. However, the Australian market is less fragmented, leaving fewer opportunities for interesting mergers.
  • The key driver for consolidation in North America is cost pressure and the access to export capacity, while the drive by Asian steelmakers to secure supplies of coking coal are the key driver for the same movement in Australia (and South East Asia).

©2011 | Wilfred Visser | thebusinessofmining.com

Oliver Wyman: Commodities bubble

February 15, 2011 Comments off

2015: Based on favorable demographic trends and continued liberalization, the growth story for emerging markets was accepted by almost everyone. However, much of the economic activity in these markets was buoyed by cheap money being pumped into the system by Western central banks. Commodities prices had acted as a sponge to soak up the excess global money supply, and commodities-rich emerging economies such as Brazil and Russia were the main beneficiaries. High commodities prices created strong incentives for these emerging economies to launch expensive development projects to dig more commodities out of the ground, creating a massive oversupply of commodities relative to the demand coming from the real economy. In the same way that over-valued property prices in the US had allowed people to go on debt-fueled spending sprees, the governments of commodities-rich economies started spending beyond their means. They fell into the familiar trap of borrowing from foreign investors to finance huge development projects justified by unrealistic valuations.

Once the Chinese economy began to slow, investors quickly realized that the demand for commodities was unsustainable. Combined with the massive oversupply that had built up during the boom, this led to a collapse of commodities prices. Having borrowed to finance expensive development projects, the commodities-rich countries in Latin America and Africa and some of the world’s leading mining companies were suddenly the focus of a new debt crisis. In the same way that the sub-prime crisis led to a plethora of half-completed real estate development projects in the US, Ireland and Spain, the commodities crisis of 2013 left many expensive commodity exploration projects unfinished.”

Source: Oliver Wyman: The Financial Crisis of 2015, February 2011

Observations:

  • Oliver Wyman, the international consulting firm, recently published a report in which it describes ‘the avoidable history’ of the next financial crisis. It foresees a bubble of commodity prices, caused by cheap money supply to developing countries in reaction to increased regulation in the developed world.
  • Wyman lists a number of prevention measures that should help to prevent the scenario sketched above from happening, removal of subsidies and scenario planning for development decisions being the most applicable to the mining sector.

Implications:

  • The factors Wyman does not include in its analysis are the long development lag of natural resources projects, causing supply to trail demand changes by several years, and competitive dynamics in the industry. Both factors might eventually strenghten the effects described, but a burst 2015 might be a too aggressive timeline.
  • Careful analysis of the sustainability of demand growth in Asia, in particular in China, is crucial for the investment decisions for long term projects in all mining firms, not only the companies that have Chinese customers. Once Chinese demand slows down the global fulfillment dynamics will change, making the low cost suppliers (totalling production and transportation costs) survive.

©2011 | Wilfred Visser | thebusinessofmining.com

India Venture to Bid for Coal Block in Mongolia

January 11, 2011 Comments off

“India’s International Coal Ventures Pvt., or ICVL, plans to bid for developing huge coal reserves in Mongolia’s Tavan Tolgoi mining deposit, government officials and industry executives said Thursday. ICVL’s interest in the Mongolian block comes at a time when coal and other resource sectors are seeing a wave of multibillion dollar mergers and acquisitions activity globally, much of it driven by increasing consumption in emerging economic giants China and India.

The Indian company is lining up for a tender offer by the Mongolian government scheduled Jan. 17 to develop part of the Tavan Tolgoi mine in the country’s southeast. The mine contains some of the world’s largest unexploited reserves of coking coal, a key raw material for making steel. Overall, the mine has an estimated coking and thermal coal reserves of 6.4 billion metric tons. ICVL will likely bid for a share in the mine’s western block with reserves of 1 billion tons, a Mines Ministry official told Dow Jones Newswires.”

Source: Wall Street Journal, January 6 2011

Observations:

  • ICVL has been created by the Indian government in order to secure metallurgical coal and thermal coal assets in overseas territories. The objective of the vehicle is to own 500 million tons of reserves by 2020.
  • This blog predicted increased interest for the Tavan Tolgoi deposit last week, after speculations on an Indian counterbid to Rio Tinto’s interest in Riversdale.

Implications:

  • If ICVL invests in Tavan Tolgoi with the objective of exporting the coking coal to India this will pose a logistical challenge. The coal would have to be transported to a Chinese harbour to be shipped to India, while export to the Chinese market would be much more logical. It is likely ICVL will strike a deal with trading partners to balance and fulfill the demand.
  • The strategy of the Mongolian government on commercialisation of the Tavan Tolgoi field is still very much uncertain. A partial IPO was announced in June 2010. Potentially the government will look for an international mining company to control the development together with the Mongolian Mining Corp (MMC), triggering a bidding war.

©2011 | Wilfred Visser | thebusinessofmining.com